The Massachusetts regulator compared Scottrade’s argument to trying to fit a square peg in a round hole.

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Scottrade in Atlanta. (Photo: John Disney/ALM)

The Massachusetts Securities Division is fighting back against Scottrade’s move to have the recent charge levied against the broker-dealer for violating the Labor Department’s fiduciary rule removed to a federal court.

Attorneys representing the Enforcement Section of the Massachusetts Securities Division, which claimed Scottrade violated the fiduciary rule, said in an April 13 filing that Scottrade’s attempts fail to satisfy terms of the removal statute in two separate respects.

First, the attorneys state, action by a state agency to enforce the Massachusetts Securities Act is not one “of which the district courts of the United States would have original jurisdiction … as even Scottrade itself does not contend that the Enforcement Section could have filed its action in this Court.”

Moreover, the securities division’s action against Scottrade “was also not initially ‘brought in a State court,’ … but instead was filed within a State administrative agency,” the filing states.

In a March 16 filing, Scottrade states that the securities division was attempting, through its administrative action, to enforce the fiduciary rule despite the fact that Labor has suspended enforcement until July 2019.

The Massachusetts Securities Division, headed by William Galvin, charged Scottrade with violating the impartial conduct standards laid out in the Labor Department’s fiduciary rule, which took effect on June 9, 2017.

Galvin charged the broker-dealer with “dishonest and unethical activity and failure to supervise” for conducting sales contests that violated Labor’s impartial conduct standards.

Scottrade also argued that the Employee Retirement Income Security Act “completely preempts such state enforcement actions.”

But attorneys for the Massachusetts regulator argued in their April 13 filing that because the action “is taken with respect to Scottrade’s treatment of individual investors holding IRAs, rather than those included within employer-sponsored plans,” Title I of ERISA “has no bearing here, and the only arguably relevant portion of ERISA is Title II.”

When parties and courts refer to ERISA, the attorneys wrote, “more often than not, they mean Title I of the Act,” which “is the portion of the law that regulates retirement plans established or maintained by employers, unions, or both.”

ERISA preemption provisions, the attorneys continued, “do not govern IRAs … and Scottrade’s attempted invocation of ERISA preemption is no more fitting for this case than a square peg is for a round hole.”

Melanie Waddell

Melanie is Washington Bureau Chief, Investment Advisory Group. She also covers regulatory and compliance issues and writes The Playing Field column and Human Capital briefing. Reach her at mwaddell@alm.com. On twitter: @Think_MelanieW

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